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Seachange International (SEAC) - Q3 2019 Earnings Report


We've been following the progress of SEAC since investing in the company far too modestly in size :( earlier this year. At the time of purchase, SEAC fit our target profile of a small company undergoing rapid change due to exogenous events, creating a compelling risk-reward opportunity when the company's stock became (we believe temporarily) severely depressed due to investor uncertainty over operational challenges related to the transition of the company's business model from a license to a SaaS approach. To recap, an activist investor, Karen Singer / TAR Holdings LLC, came along took a large (16.6%) stake in the company towards the end of 2018 and into 2019 (see 13D filings here, here, here and here). As a result of this shareholder activism, the company's CEO resigned (in a huff BTW - see here) (PR link here)...

...and the company appointed several new directors at the behest of Singer & TAR Holdings (PR link here)...

Subsequently, the board was further reconstituted, new director Robert Pons was elevated to board chairman (see here) and Chief Commercial Officer Yossi Aloni was named new CEO (see here). Thus, virtually the entirety of SEAC's leadership has turned over, allowing for a fresh start for the company (obviously a good thing after years of underperformance [the stock was nearly $8/share as recently as March 2015]).

The company's business involves selling software products and services to facilitate the aggregation, licensing, management and distribution of video and advertising content for service providers, telecommunications companies, satellite operators and broadcasters (historically this was just applicable to television set-top boxes, however more recently SEAC has expanded its product offering to embrace PCs, tablets, smart phones and OTT streaming players). SEAC's customers include the following: operators, such as Liberty Global, plc, Altice NV, Cox Communications, Inc. and Rogers Communications, Inc.; telecommunications companies, such as Verizon Communications, Inc., AT&T, Inc. and Frontier Communications Corporation; satellite operators such as Direct TV and Dish Network Corporation; and broadcasters. SEAC historically sold and licensed its products and services on a standalone basis (i.e., a license model). Commencing February 2019, however, the company adopted a value-based selling approach as part of which SEAC offers customers the ability to license all of its product and services, including specified upgrades, for a fixed period of time for a fixed price which SEAC refers to as Framework deals (i.e., a SaaS model). The transition from a license model to a SaaS model caused a (seemingly) temporary downturn in revenue generation; however, as the SaaS model ramps up fully, we would expect revenues and cash generation to increase over time. The following is a schematic of SEAC's Framework solution (source):

In terms of recent operating performance, SEAC's new leadership seems to have steadied the ship. In Q1 of 2019, revenues fell 43% (from $14.9MM to $8.5MM), while in Q3 of 2019 revenues actually increased 10% (from $18.6MM to $20.5MM), as the company has finalized more and more of its Framework agreements with customers. On the expense side of the ledger, SEAC has engaged in restructuring which should yield annualized cost savings of approximately $12 million going forward. Overall, the company flipped to profitability in the most recently completed quarter, generating $2.15MM in net income in Q3 2019, after racking up an accumulated deficit of $193MM over its prior history (dating back to July 1993 [note that the company IPO'd in 1996]). The only real disappointment has been that the company's cash balance has not increased commensurately with the other metrics, as cash and marketable securities as of 10/31/19 were $5.9MM and $7.9MM, respectively (SEAC lowered its expectations for cash at the end of the fiscal year to $14-16 million, from the previous $22 – 25 million). The real question is whether CEO Alosi and his team can keep up the positive momentum. Below is a summary of SEAC's financial performance for the 3- and 9-months ended 10/31/19:

As to the future, SEAC's management reiterated its full-year revenue and operating income guidance of $70 to 80MM and $0.03 to 0.19 per share, respectively. Full guidance as of December 4th is as follows [source]:

Finally, we would be remiss not to include the performance of the stock recently (so far, so good, but nobody in the company, nor any shareholder, should declare victory so quickly--there a lot of tough work ahead to prove that SEAC has truly and permanently turned around):

DISCLOSURE: Long SEAC.

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